US Stocks Rally Into New Year, Boosted By Data; DJIA Up 125

DonnaKardos

NEW YORK (MarketWatch) -- U.S. stocks started the first trading day of 2011 with a bang, rallying to fresh two-year highs as improving manufacturing conditions and rising construction spending added to investors' hopes for the economic recovery to continue.

The Dow Jones Industrial Average jumped 125 points, or 1.1%, to 11702, marking the third time in a row the measure has risen on the first trading day of the year and putting it on track for its fourth gain in the last five sessions. The Dow reached 11711.47, its highest intraday level since August 2008.

Bank of America led the measure's climb, jumping 5.2%. The banking giant said it expects to take a provision of about $3 billion in the fourth quarter to buy back bad loans from Freddie Mac and Fannie Mae that were issued by its troubled Countrywide Financial unit. Investors were relieved to see the overhang removed and the size of the hit from the bad-loan repurchases quantified.

Alcoa and Boeing were also strong, boosted by upgrades from analysts. Alcoa climbed 4.4% after Deutsche Bank raised its investment rating on the aluminum giant's stock to buy from hold, citing "growing optimism" on the likelihood for higher aluminum prices and a belief that "Alcoa has turned the corner from an operational point of view." Boeing climbed 1.8% after J.P. Morgan upgraded its investment rating on the stock to overweight from neutral, citing an improving outlook for core commercial aircraft.

However, Intel fell 0.5%. Piper Jaffray cut its investment rating on the stock to neutral from overweight, saying Intel is missing the wave of "ultramobile devices," and it expects PC unit growth to decline.

The Nasdaq Composite added 1.8% to 2702 and reached a three-year intraday high at 2704.86. The Standard & Poor's 500 index gained 1.4% to 1275 after hitting a two-year intraday high at 1276.35.

Boosting sentiment, a reading on manufacturing from the Institute for Supply Management rose. Investors were especially encouraged to see the ISM's new orders index jumped back to 60.9 from 56.6.

"That's a strong positive going forward for the manufacturing sector," said Nino Jimenez, senior vice president at Brinson Patrick Securities.

In addition, U.S. construction spending rose for a third consecutive month during November, a sign the industry is recovering despite high unemployment and difficulty getting financing.

The data helped bolster investors' expectations for a host of other economic updates due this week, including retailers' December sales and the government's monthly nonfarm payrolls, to also point to a continuing recovery.

"Today's just a continuation of what we've been seeing for the past four months," said Adam Sarhan, chief executive of Sarhan Capital. He pointed to four primary drivers for the gains: the improving economic recovery, easing worries over euro-zone debt, the Federal Reserve's stimulus program, and optimism for U.S. companies' fourth-quarter earnings reports.

"If we do have a strong Q4 earnings season, it's going to bode well for equity markets in the near future," Sarhan said. He noted Deutsche Bank's upgrade of Alcoa comes a week before the company is set to kick off the earnings season.

A positive start to the year tends to bode well for the rest of the year; since 1945, when the S&P 500 has risen on the first day of the year, it has averaged a gain of 10.6% for that year, according to Birinyi Associates.

The gains in U.S. stocks on Monday followed rallies overseas in Asia and Europe, with Europe's markets bolstered by euro-zone manufacturing data that showed the sector's expansion accelerated more than expected in December.

The U.S. Dollar Index, tracking the U.S. currency against a basket of six others, edged up 0.1%. Demand for Treasurys fell, lifting the yield on the 10-year note up to 3.35%. Gold futures slipped.

Among stocks in focus, Barnes & Noble climbed 5.9% after the bookseller said its preliminary holiday same-store sales surged 9.7%, partly thanks to strong sales of its Nook e-reader device. The company said last week that the Nook had become the best-selling product in its nearly 40-year history.

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